Unfair but balanced commentary on tax and budget policy, contemporary U.S. politics and culture, and whatever else happens to come up

Thursday, March 29, 2007

Five commentators not in search of an author

Now that the brutal winter weather has finally passed, I made the mistake the other week of – well, the fates must have considered it crowing on my part – that, in twelve years, the NYU Tax Policy Colloquium has never once lost a session due to speaker unavailability. The obvious threat being that winter storms would prevent someone from coming in. (We meet from January through April.) We have had some close calls, and quite a few storms would have canceled us if they had come on the wrong day of the week (or if we’d had an out of town speaker in a given week), but never once a cancellation.

Sure enough, no sooner did I laud this fact then something happened. Our scheduled speaker this week was Kirk Stark of UCLA Law School, with a very interesting paper (if still in preliminary form) on fiscal equalization, or national programs transferring resources from rich states to poor states. He says that nearly all federations in the world other than the U.S. have such a program, and the U.S. at least formally doesn’t. (Which is not to deny that we might have the effective equivalent via differently labeled programs.) To see the paper, check out the March 29 date here.

Anyway, on Tuesday night Kirk contacted me to say that he unfortunately couldn’t come because he has the flu. One can certainly sympathize. I am just getting over a horrendous cold, which I would assume was rather like what he had only minus the fever, and even in my state I wouldn’t have wanted to board a transcontinental flight. With a fever it would have been unthinkable.

My first thought was that we would have to cancel today’s session. But then it occurred to me (with the help of my co-convenor, Alan Auerbach) that we could go on anyway. The NYU colloquium has an unusual format, in which the author doesn’t actually present the paper. Instead, we do and the author responds to our critiques of various issues. So one could say (it was the obvious joke that several people independently thought of) that this is simply the perfection or logical culmination of our method – no author whatsoever.

Not true, of course, and we would rather have had Kirk here. But with the help of several special commentators I enlisted to ensure multiple perspectives (Rosanne Altshuler, Jack Mintz, and Brian Galle), we actually had a pretty good session. Hence (counting Alan and me) the five commentators not in search of an author, from my title for this posting.

Bottom line conclusion of the session, without Kirk there to defend his view: to start with a bit of background, the paper proposes fiscal equalization based on tax capacity (i.e., potential revenue at a given level of “effort”) to respond to a fiscal federalism problem of inducing migration from poor to rich jurisdictions if public goods are like lump sum grants in their incidence but are financed by means-based taxes. This is merely a subset of the general fiscal federalism case for keeping redistribution to the highest level of government and having lower levels stick to providing competitive tax-benefit packages, with user fee style financing, a la the Tiebout model (named for Charles Tiebout’s famous 1956 paper).

We were unpersuaded that the paper’s proposed cure, payments to poor states (effectively financed by rich states) that seek to equalize taxing capacity fit logically with the diagnosis. Migration depends on fiscal effort, not fiscal capacity. (People move to Greenwich, CT, if the paper’s analysis is right, to get nice parks that richer people pay for, based on what Greenwich does, not what it could do.) And we thought the case is much stronger for equalizing, say, education outlays (where there is a positive externality plus an agency cost problem if parents don’t fully represent the interests of their children) than for government-provided consumer goods generally.

The paper offers an intriguing if preliminary political analysis, suggesting we don’t have fiscal equalization in the U.S. because (a) Blue States don’t want it since it transfers $$ to Red States, and (b) Red States don’t want it because their elites are anti-government and don’t want $$ given to their poorer citizens. But it’s hard to see why unrestricted cash grants to their governments wouldn’t appeal to Red State elites. Why not take free money? Better explanations, we thought, involved (a) path dependence – the U.S. started from a more decentralized status & so the thing would have had to be affirmatively introduced, plus (b) those who might have wanted it had more direct and appealing routes to getting the same thing (e.g., farm subsidies instead of $$ that depend on a complicated fiscal formula that could go the other way next year). Even the claim that we don’t currently have it, while other federations do, might conceivably be truer in form than in substance.

Anyway, not to tempt the fates yet again, but we still haven't lost a session due to speaker unavailability.

About Me

I am the Wayne Perry Professor of Taxation at New York University Law School. My research mainly emphasizes tax policy, government transfers, budgetary measures, social insurance, and entitlements reform. My most recent books are (1) Decoding the U.S. Corporate Tax (2009) and (2) Taxes, Spending, and the U.S. Government's March Toward Bankruptcy (2006). My other books include Do Deficits Matter? (1997), When Rules Change: An Economic and Political Analysis of Transition Relief and Retroactivity (2000), Making Sense of Social Security Reform (2000), Who Should Pay for Medicare? (2004), Taxes, Spending, and the U.S. Government's March Towards Bankruptcy (2006), Decoding the U.S. Corporate Tax (2009), and Fixing the U.S. International Tax Rules (forthcoming). I am also the author of a novel, Getting It. I am married with two children (boys aged 16 and 19) as well as four (!) cats. For my wife Pat's quilting blog, see Patwig’s Blog.